Fed structure may be in flux, not just rates

By Mike Dolan

Whatever happens at September's Federal Reserve meeting will pale in comparison to a wholesale rethinking of the U.S. central bank's design, a possibility stirred by Donald Trump's latest appointment. The president nominated White House advisor Stephen Miran to temporarily fill Adriana Kugler's vacant Fed board seat, reheating a debate about whether the Fed structure, its independence, and even its central role in the monetary economy should now become live questions.

That may sound like a giant leap in a discussion that has so far centered largely on how quickly the Fed should lower interest rates, and numerous big hurdles certainly limit the potential for massive institutional change. For one, Miran, who has written about re-ordering the Fed voting system and appointment process and binding the central bank more closely to government thinking, still has to be confirmed by the Senate.

While that process may be expedited, because he was already confirmed as a White House official, he would ostensibly only hold the post until Kugler's term formally ends in January. He would also only get one vote under the current system, and Trump has yet to name his pick to replace Chair Jerome Powell next May.

But most Fed watchers think Miran is likely to be confirmed for the full board term eventually, even if he's not considered a candidate for the top job.

And his appointment, the eventual new Fed Chair, along with Chris Waller, the current favorite to replace Powell when his leadership term ends in May, and fellow Trump appointee Michelle Bowman, would then give Trump a board majority.

On monetary policy at least, the five rotating regional Fed presidents on the 12-person policymaking committee can still push back. That said, their views are likely in flux since last week's employment report, and markets expect interest rate cuts to resume next month regardless.

Sowing the seeds of longer-term structural change would reside more clearly with the board itself.

'TEMPEST IN A TEAPOT?'

The wider issue of rethinking Fed structure, its functioning and independence is a much harder nut to crack. Even if a Trump-dominated board opened the process, it would likely face considerable Congressional opposition and take some time.

Many voices have been quick to downplay such speculation.

Treasury Secretary Scott Bessent, who spoke just last month of the need to examine the entire institution, also told NBC this week that Trump has "great reverence" for the central bank and just "likes to work the referees".

Former Fed officials, such as ex-New York Fed boss Bill Dudley, also think the institution and its independence will withstand Trump's repeated attacks on the current leadership.

In an opinion piece on Bloomberg this week, Dudley wrote, "Don't be fooled by the drama. In terms of how the Fed manages the economy, it's mostly a tempest in a teapot." And yet the appointment of Miran - whose work also includes a radical rethink of U.S. trade policy and the controversial "Mar-a-Lago Accord" idea on cutting U.S. deficits and debt obligations - indicates that a wider Trump worldview is being injected into the Fed. For some critics, Trump's dramatic embrace of digital assets, crypto tokens and stablecoins is already an indication of a very real direction of travel that could transform the monetary world and banking system. Former International Monetary Fund chief economist Kenneth Rogoff wrote this week that Trump's stablecoin framework bears striking similarities to the free-banking era of the 1800s, when the United States did not have a central bank.

"At the time, private banks issued their own dollar-backed currencies, often with disastrous consequences such as fraud, instability and frequent bank runs," Rogoff wrote on the Project Syndicate site.

While similar problems are "bound to emerge" with stablecoins, particularly tax evasion, he added that top stablecoin issuers today are at least more transparent and better capitalized than their nineteenth-century cousins.

What happens to the Fed's role in a potential world of private money, however, is a whole other question.

Trump supporters regularly insist that his asides and off-the-cuff remarks are often taken too literally and that people catastrophize what ends up being fairly sensible plans.

Yet dismissing Trump's intention to reshape American and global institutions has proven to be folly this year as well.

The opinions expressed here are those of the author, a columnist for Reuters

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The opinions expressed here are those of the author, a columnist for Reuters